Do You Really Have to Pay Overtime?

By Elizabeth Tipping, Partner at Cotney Construction Law, LLP.

Let’s talk about one area in particular – whether you need to pay overtime and to whom.

The holidays are behind us and we’ve started a new year. Now is a time for making resolutions. A time for looking back over the previous year and making goals for the new one. As we begin this new year, it is also wise for construction businesses to review their policies and confirm that proper procedures are in place to meet state and federal laws.

Let’s talk about one area in particular – whether you need to pay overtime and to whom.

At first, this question seems easy when talking about the construction business. The law says you need to pay overtime to employees but not to independent contractors. Doesn’t that mean that construction companies don’t need to pay overtime to the folks they have hired as “subcontractors”?

The answer is not that simple.

Last year alone, because of Department of Labor investigations, more than 60 construction companies agreed to pay over $25 million in back pay and penalties after failing to pay overtime and other benefits to their workers. These included general contractors, roofing companies, drywall and framing companies, painting companies, electrical companies, and concrete companies.

Most of these companies weren’t trying to skirt the law or take advantage of their workers. They probably just believed – incorrectly, as it turns out – that they did not have to pay overtime to their 1099 workers or their site managers.

So how do you avoid being one of these companies? How can you tell which of your workers are entitled to overtime?

First, don’t assume that the word subcontractor is the same as the phrase “independent contractor” used by the Department of Labor or Internal Revenue Service. The DOL and the IRS look beyond the title given to workers.

Second, don’t decide that a worker is not an employee because you hired him as a “1099 worker.” I frequently hear this explanation given for why a company doesn’t consider its workers to be employees. This is a case of putting the cart before the horse – simply put, the decision to issue either a 1099 or W-2 to your worker is based on whether he is, in fact, an independent
contractor or an employee. Not the other way around.

Third, don’t conclude that a worker should not receive overtime because of how he is paid – salary, piece rates, daily rates, or otherwise. Again, the DOL and IRS are going to look deeper than this.

As you might have already surmised, answering the question of whether a worker is an employee or an independent contractor is based on the circumstances surrounding their employment. The key is the relationship between the worker and the hiring company.

It is important to note that a company cannot simply call a worker a “contractor” in order to avoid paying overtime. The company and worker cannot sign a contract stating that the worker will be a “contractor” and automatically make that worker a “contractor.” Nor can the company ask the worker to form a separate company (for example, Joe Worker, LLC) to make the worker a “contractor.”

Both the DOL and the IRS look at the relationship between the worker and the hiring company to decide whether a worker is an employee. The government agencies look at different factors that essentially boil down to how much independence the worker has in the employment relationship. The DOL or IRS will likely consider a worker to be an employee instead of an independent contractor if the construction company is: (a) telling the employee when and where to work; (b) training the employee how to perform the work; or (c) providing the employee with the tools or equipment needed to complete the work. And, of course, there are other factors that may be considered beyond these three.

If the factors indicate that your workers are employees instead of independent contractors, you must pay overtime and benefits (unless they fall within an “exempt” category – a topic that could easily fill another article). Do not become one of the roofing companies included in the Department of Labor’s 2019 investigations because you misclassified your workers!

Learn more about Cotney Construction Law.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.